For those owning shares of Petróleo Brasileiro (NYSE: PBR), the Brazilian oil giant, it has so far been a lesson from “the School of Hard Knocks” as the share price has been pounded in recent trading. But Petróleo Brasileiro has all of the attributes needed to achieve financial goals for long-term investors. Its present travails should be looked upon as an opportunity buy a Big Oil stock at a big discount.
Petróleo Brasileiro is down in double-digits in recent market actions due to its pricing policy for gasoline and diesel fuel. That can be attributed to the government of Brazil, which exercises a great deal of authority over the company. Many times that influence has resulted in a negative impact on the share price of the company. It would have certainly helped the stock in recent buying and selling if guidance was issued for the company for future pricing, but none was forthcoming.
Also driving the stock price down was Credit Suisse downgrading Petrobras Brasileiro from a buy to a sell. That is a very forceful action by an investment firm.
The 2013 Upgrade of Petrobras Brasileiro
Earlier in the year, we had upgraded Petrobras to outperform predicated on inflection points on three fronts: (1) production growth, (2) management’s credibility and early achievements to turn Petrobras around, and (3) the possibility of a more benign government attitude with surprise price increases. Of those three, production growth is very much intact, but the latter two were significantly impaired after last Friday’s announcement.
At around $14 a share, Petrobras Brasileiro is trading at an extremely low price-to-earnings ratio of just 8. That is a very alluring ratio for a foreign oil entity. By contrast, Eni SpA (NYSE: E), an Italian firm, is at a price-to-earnings ratio of over 25. Repsol (OTC: REPYY), a Spanish oil and natural gas company, trades at a price-to-earnings ratio close to 12.
The Future Is Bright
The global demand for energy is increasing. That will have to be met by fossil fuels, which should drive the price up based on supply and demand factors. Despite the promise, there is no source of alternative energy that can deliver on the scale and cost basis needed to meet the demands of the marketplace. Fossil fuels will have to satisfy the world’s expanding need for energy.
Oil and natural gas are the best choices, by far.
Coal is becoming more and more undesirable as a fuel choice. The Obama Administration has what has been called “the war on coal.” China, the world’s largest user of coal, has announced that as part of its economic reforms, it is moving to lessen its dependence due to the detrimental effects on the environment.
Petrobras Brasileiro Will Benefit from Emerging Markets
There will thus be a greater demand for oil and natural gas from companies like Petrobras Brasileiro. Headquartered in Brazil, Petrobras Brasileiro is ideally situated to meet the rising demand for energy from emerging market countries such as China and India. The increasing needs for Brazil’s 200 million residents alone, the fifth largest populace in the world, is expected to be substantial.
Over the last week of market action, Petrobras Brasileiro is down more than 16%. That should be looked upon as the opportunity to buy at a discount for the long-term. Now around $14 per share, the 52-week high is over $20. With the demand for oil and natural gas increasing around the world, so should the stock price of Petrobras Brasileiro.
What are your thoughts on Petrobras Brasileiro?